United States: The New Stark Law Value-Based Exceptions Seek To Advance The Shift From Volume To Value In The Delivery Of Health Care In The United States

On November 20, 2020, the Department of Health and Human Services (HHS) released final rules, effective as of January 19, 2021 (with limited exception), amending and updating the Stark Law,¹ the Anti-Kickback Statute (AKS),² and the civil monetary penalty (CMP) rules concerning beneficiary inducements.³ These final rules were issued in conjunction with the "Regulatory Sprint to Coordinated Care", which was launched by HHS in 2018, in an effort to accelerate the transition of the United States health care system from volume-based to value-based care. HHS believes that this transition will "meaningfully improve the quality of care received by all American patients".⁴ This article focuses on the new value-based exceptions, and integrally-related value-based definitions, introduced by the new Stark Law final rule.⁵

The Stark Law

The Stark Law prohibits a physician from referring his or her Medicare or Medicaid patients for the furnishing of certain designated health services (DHS) to an entity with which the physician (or his or her immediate family member) has a financial relationship, unless an exception applies.⁶ Because the Stark Law is a strict liability statute, any prohibited referral automatically violates the statute unless the financial relationship between the referring physician and the entity to which the physician refers a patient for DHS (DHS Entity) fully satisfies an applicable exception. Stark Law exceptions, in turn, are applicable to either or both of two types of financial relationships that exist between a referring physician and a DHS Entity, specifically, compensation arrangements and ownership or investment interests.

The New Stark Law Final Rule

The Stark Law was originally enacted to combat patient and program abuses that arise in a volume-based, fee-for-service (FFS) health care delivery and payment system. Chief among these abuses is financially-motivated physician referrals that result in unnecessary utilization of health care services. While a transition to value-based health care may, among other things, mitigate, to some degree, overutilization and other value-based abuses, the Stark Law has not historically been structured to facilitate value-based arrangements or combat abuses that may arise in connection therewith.

The new Stark Law final rule seeks to remedy these deficiencies by establishing three new exceptions for value-based compensation arrangements between or among physicians, providers, and suppliers.[7] Codified at 42 U.S.C. §411.357(aa), these Stark Law value-based exceptions protect compensation arrangements (but not ownership or investment interests) that satisfy specified requirements based on the level of financial risk undertaken by the parties to such arrangements. Integral to the application of these new value-based exceptions are the new value-based definitions for the following terms: value-based arrangement, value-based activity, value-based purpose, value-based enterprise (VBE), VBE participant, and target patient population.

The New Stark Law Value-Based Definitions

The new Stark Law value-based definitions are "interconnected and, for the best understanding, should be read together".⁸ From a broad perspective, each of the three new value-based exceptions offer Stark Law protection to certain "value-based arrangements". Value-based arrangements eligible for such protection are arrangements that seek to further at least one "value-based activity". A value-based activity, in turn, must be reasonably designed to achieve at least one "value-based purpose" of a "value-based enterprise" (or "VBE") for a particular "target patient population". Finally, the parties to a qualifying value-based arrangement must either be the VBE and one or more of its "VBE participants" or, alternatively, VBE participants in the same VBE. With this overview in mind, let's delve into each of the new value-based definitions.⁹

• "Value-based arrangement"

"Value-based arrangement means an arrangement for the provision of at least one value-based activity for a target patient population to which the only parties are-(1) the value-based enterprise and one or more of its VBE participants; or (2) VBE participants in the same value-based enterprise."

As previously noted, only "compensation arrangements" (and not ownership or investment arrangements) qualify as "value-based arrangements" for purposes of the new value-based exceptions. Further, only those compensation arrangements between a physician (or an immediate family member of a physician) and an entity to which the physician makes referral for DHS (and not compensation arrangements between a payor and a physician) qualify as "value-based arrangements". Of note, qualifying "value-based arrangements" must ultimately relate to a target patient population, but are not limited to arrangements that seek to coordinate and manage the care of a target patient population, although most "value-based arrangements" will likely seek to do so.

• "Value-based activity"

"Value-based activity means any of the following activities, provided that the activity is reasonably designed to achieve at least one value-based purpose of the value-based enterprise: (1) the provision of an item or service; (2) the taking of an action; or (3) the refraining from taking an action."

CMS has declined to provide specific examples of "value-based activities". Rather, CMS has stressed that whether an activity constitutes a "value-based activity" requires "a fact-specific analysis [that] turns on whether the activity is reasonably designed to achieve at least one value-based purpose of the value-based enterprise".¹⁰ Parties must have a "good faith" belief that a "value-based activity" is reasonably so designed. However, there is no requirement that the "value-based activity" actually succeed in achieving at least one value-based purpose to qualify as a "value-based activity". Nonetheless, the parties are expected to enter the arrangement with the intent to fulfill their value-based activity and are ill-advised to enter into such an arrangement as "smoke and mirrors" or not in good faith. CMS has further instructed (without further explanation) that if the parties are aware that a purported "value-based activity" is not furthering its intended value-based purpose, the activity will no longer qualify as a "value-based activity" and the parties will likely need to terminate or amend the applicable value-based arrangement.

• "Value-based purpose"

"Value-based purpose means any of the following: (1) coordinating and managing the care of a target patient population; (2) improving the quality of care for a target patient population; (3) appropriately reducing the costs to or growth in expenditures of payors without reducing the quality of care for a target patient population; or (4) transitioning from health care delivery and payment mechanisms based on the volume of items and services provided to mechanisms based on the quality of care and control of costs of care for a target patient population."

Each of the described "value-based purposes" relates to a target patient population. To be eligible for protection under a Stark Law value-based exception, a value-based arrangement must seek to further at least one value-based activity, which activity must be anchored by at least one "value-based purpose." Note that simply maintaining the quality of care enjoyed by an identified target patient population, without also reducing the costs to, or growth in expenditures of, payors in connection with the applicable target patient population, does not satisfy either the second or third "value-based purpose". Also note that the fourth "value-based purpose" may be satisfied by start-up or preparatory activities seeking to transition from furnishing patient care services in a volume-based, FFS system to furnishing patient care services in a value-based health care delivery and payment system.

• "Value-based enterprise (or VBE)"

"Value-based enterprise (VBE) means two or more VBE participants-(1) collaborating to achieve at least one value-based purpose; (2) each of which is a party to a value-based arrangement with the other or at least one other VBE participant in the value-based enterprise; (3) that have an accountable body or person responsible for the financial and operational oversight of the value-based enterprise; and (4) that have a governing document that describes the value-based enterprise and how the VBE participants intend to achieve its value-based purpose(s)."

A "value-based enterprise" is "essentially a network of participants (such as clinicians, providers, and suppliers) that have agreed to collaborate with regard to a target patient population to (a) put the patient at the center of care through care coordination, (b) increase efficiencies in the delivery of care, and (c) improve outcomes for patients."¹¹ A "value-based enterprise" need not have a particular legal structure and may be either formal or informal. Likewise, the required accountable body (if there is no accountable person) need not have a particular structure or composition and the required governing document need not have a particular form or content.

• "VBE participant"

"VBE participant means a person or entity that engages in at least one value-based activity as part of a value-based enterprise."

As used in the definition of "VBE participant", the term "person or entity" refers to both natural and non-natural persons. Further, the term "entity" is not limited to an entity that furnishes DHS. Indeed, CMS confirms that the definition of "VBE participant" does not exclude any specific persons, entities, or organizations.

• "Target patient population"

"Target patient population means an identified patient population selected by a value-based enterprise or its VBE participants based on legitimate and verifiable criteria that-(1) are set out in writing in advance of the commencement of the value-based arrangement; and (2) further the value-based enterprise's value-based purpose(s)."

The "target patient population" is the group of individuals for which the parties to a value-based arrangement are undertaking a value-based activity(ies). The selection of the "target patient population" may not be driven by profit motive or purely financial concerns. For example, under most circumstances, selecting a "target patient population" consisting of only healthier, lucrative or adherent patients to the exclusion of less healthy, lucrative or adherent patients (cherry-picking) or avoiding unhealthy, costly or noncompliant patients altogether (lemon-dropping) will not be permissible as such selection criteria will not be legitimate, even if verifiable. Despite this admonition, CMS has refused to explicitly prohibit specific selection criteria, including selection by cherry-picking or lemon-dropping, or provide a list of selection criteria that will be deemed permissible. CMS has, however, affirmatively indicated that legitimate and verifiable criteria "may include medical or health characteristics ., geographic characteristics..., payor status..., or other defining characteristics".¹²

Each of these new Stark Law value-based definitions is critical to a proper understanding and application of each of the new Stark Law value-based exceptions, which we will now discuss.

The New Stark Law Value-Based Exceptions

Since its inception, the Stark Law has attempted to curb patient and program abuses that may result from volume-driven, FFS arrangements-including overutilization of health care services, improper steering of patients, and corruption of medical decision making. If successful, the shift to value-based arrangements advocated by the "Regulatory Sprint to Coordinated Care" should, to some degree, inherently safeguard against such volume-based abuses, particularly where the parties to such arrangements accept a certain level of financial risk in connection with such arrangements. As CMS has stated: "in general, the greater the economic risk that providers assume, the greater the economic disincentive to overutilize services".¹³ Consistent with this recognition, the three new Stark Law value-based exceptions are differentiated based on the level of financial risk that the parties to a value-based arrangement are willing to accept in connection with the arrangement.

It is important to note, however, that value-based arrangements may lead to their own patient and program abuses-including underutilization of health care services (stinting of care), cherry-picking and lemon-dropping. In an effort to curb these abuses, the value based exceptions include certain safeguards against such abuses. Further, each of the value-based exceptions is only available to parties that qualify under the value-based definitions-definitions that CMS developed, in part, to also curb value-based abuses. For example, a "value-based purpose" must relate to a "target patient population", which, as noted above, generally may not be selected by cherry-picking or lemon-dropping individuals. Now, let's turn to the exceptions.

• Requirements applicable to each of the three value-based exceptions

As noted, each of the value-based exceptions fall along a continuum in which the less financial risk the parties accept in connection with a value-based arrangement-from "full financial risk" to "meaningful downside financial risk" to "no financial risk"-the greater the number of requirements the parties must satisfy under the applicable exception. Before detailing the additional requirements included in each of the value-based exceptions, we first discuss the following five requirements that are included in all three exceptions:¹⁴

1. The remuneration is for or results from value-based activities undertaken by the recipient of the remuneration for patients in the target patient population.

CMS considers this an objective standard. Thus, payments for referrals or any other actions or business unrelated to the target patient population, such as general marketing or sales arrangements, will not be protected under any of the value-based exceptions. Further, any in-kind remuneration received in connection with the applicable value-based arrangement must be necessary and not simply identical technology or other infrastructure to that the recipient already possesses.

2. The remuneration is not an inducement to reduce or limit medically necessary items or services to any patient.

This requirement is also integrated into most of the CMS-sponsored alternative payment models, including accountable care models, episode-based payment models, and primary care transformation models. CMS has stressed that violation of this requirement is inherently suspect and may also implicate the CMP rules.

3. The remuneration is not conditioned on referrals of patients who are not part of the target patient population or business not covered under the value-based arrangement.

This requirement is similar to the first requirement described above, but is included to emphasize that any value-based arrangement where a party to the arrangement has conditioned any remuneration thereunder on referrals of patients outside of the target patient population (or other business outside of the value-based arrangement) is not protected under any of the value-based exceptions.

4. If remuneration paid to a physician under a value-based arrangement is conditioned on the physician's referrals to a particular provider, practitioner, or supplier, the requirement to make referrals to a particular provider, practitioner, or supplier (a) is set out in writing and signed by the parties, and (b) will not apply if the patient expresses a preference for a different provider, practitioner, or supplier; the patient's insurer determines the provider, practitioner, or supplier; or the referral is not in the patient's best medical interests in the physician's judgment.

Noting that a Medicare beneficiary's right to choose a provider of care is expressed and reinforced in almost every aspect of the Medicare program, CMS has included this requirement in all three value-based exceptions. The purpose of this requirement is to ensure that, regardless of the nature of the value-based arrangement and its value-based purpose(s), a patient's choice of health care provider, the ability of health insurers to efficiently provide care to their members, and the physician's medical judgment are adequately protected.

5. Records of the methodology for determining and the actual amount of remuneration paid under the value-based arrangement must be maintained for a period of at least 6 years and made available to the Secretary upon request.

CMS expects that parties are familiar with these requirements and that the maintenance of such records is part of their routine business practices.

Beyond these five requirements that are included in each of the three value-based exceptions, the number of additional requirements that must be satisfied under a value-based exception increases as the level of financial risk accepted by the parties in connection with the value-based arrangement decreases. Let's walk through each value-based exception.

• The Full Financial Risk Exception

The "full financial risk exception"¹⁵ requires a value-based enterprise to a value-based arrangement to assume, throughout the entire duration thereof, full financial risk in connection with the value-based arrangement (or be contractually obligated to assume full financial risk within the 12 months following the commencement of the value-based arrangement).

"Full financial risk" means that "the value-based enterprise is financially responsible on a prospective basis for the cost of all patient care items and services covered by the applicable payor for each patient in the target patient population for a specified period of time". ¹⁶

CMS ultimately did not specify or limit acceptable methods of assuming full financial risk. CMS did, however, affirm that full financial risk may take the form of capitation payments (that is, a predetermined payment per patient per month or other period of time) or a global budget payment from a payor that compensates the value-based enterprise for providing all patient care items and services for a target patient population for a predetermined period of time.

Additional requirements: Beyond the five requirements that are included in each of the three value-based exceptions, the only additional requirement included in the full financial risk exception is that a "value-based enterprise" to the value-based arrangement must assume "full financial risk" as described herein.

• The Meaningful Downside Financial Risk Exception

The "meaningful downside financial risk exception" ¹⁷ requires an individual physician(s) to a value-based arrangement to assume, throughout the entire duration thereof, meaningful downside financial risk for failure to achieve the value-based purpose(s) of the value-based enterprise.

"Meaningful downside financial risk" means that "the physician is responsible to repay or forgo no less than 10% of the total value of the remuneration the physician receives under the value-based arrangement".¹⁸

CMS has repeatedly emphasized that the three value-based exceptions "are designed to accommodate movement toward two-sided financial risk."¹⁹ Two-sided financial risk in the health care context consists of a combination of "upside financial risk" (typically, the risk that a health care provider will not achieve health care savings, in which the provider and the payor can share, over and above a budgeted benchmark) and "downside financial risk" (typically, the risk that a health care provider who does not achieve the budgeted health care savings benchmark will be required to refund the payor all or part of any amount by which the health care savings achieved fall below the budgeted benchmark). A health care provider that takes on upside financial risk is incented to achieve health care savings in an effort to earn remuneration over and above that to which the provider is otherwise entitled. However, a provider who only takes on upside financial risk is not at risk of losing that remuneration to which the provider is otherwise entitled even if the budgeted savings benchmark is not achieved.

In contrast, a health care provider who takes on "meaningful" downside financial risk likely has a greater incentive to achieve health care savings over and above the budgeted benchmark as the failure to do so will result in the provider losing remuneration to which the provider would otherwise be entitled. It is this greater risk, i.e., meaningful downside financial risk, that CMS believes protects against the volume-based, FFS program and patient abuses that the Stark Law was originally intended to deter while also enabling CMS to include fewer additional requirements in this exception than included in the no financial risk exception discussed below.

Additional requirements: Beyond the five requirements that are included in each of the three value-based exceptions, and in addition to the requirement that individual "physician(s)" to the value-based arrangement assume "meaningful downside financial risk" as described herein, the meaningful downside financial risk exception also requires that:²⁰

1. A description of the nature and extent of the physician's downside financial risk is set forth in writing.

Although CMS has not specified what content must be included in this writing, it did emphasize that this requirement will buttress the oversight abilities of CMS as well as that of its law enforcement partners. Individuals preparing this writing would thus be well-advised to include sufficient detail to document that meaningful downside financial risk has, in fact, been accepted by a physician(s) in connection with the applicable value-based arrangement.

2. The methodology used to determine the amount of the remuneration is set in advance of the undertaking of value-based activities for which the remuneration is paid.

While the described methodology must be set in advance of the described undertaking, the parties need not know in advance the ultimate amount of remuneration that will be paid under the applicable value-based arrangement. Further, the described methodology will still be considered set in advance even if it is revised after the value-based arrangement commences provided that the new remuneration methodology is effective only on a prospective basis.

• The No Financial Risk Exception

The "no financial risk exception"²¹ permits value-based arrangements to proceed even if the parties thereto do not assume any risk in connection with the arrangements.

"No financial risk" means that the parties do not have to assume financial risk in connection with the applicable value-based arrangement at any point, or for any amount of time, during the duration of the arrangement.

Additional requirements: Beyond the five requirements that are included in each of the three value-based exceptions, the no financial risk exception, which does not require the parties to accept any financial risk as described herein, also requires that:²²

1. The arrangement is set forth in writing and signed by the parties.

The writing must include a description of (a) the value-based activities to be undertaken under the arrangement, (b) how these value-based activities are expected to further the value-based purpose(s) of the value-based enterprise, (c) the target patient population for the arrangement, (d) the type or nature of the remuneration, (e) the methodology used to determine the remuneration, and (f) the "outcome measures" (described further below) against which the recipient of the remuneration is assessed, if any.

2. The methodology used to determine the amount of the remuneration (which must be set forth in the required writing) is set in advance of the undertaking of value-based activities for which the remuneration is paid.

This requirement is identical to that set forth in the meaningful downside financial risk exception and can be interpreted in a similar manner. See comments above.

3. The outcome measures against which the recipient of the remuneration is assessed, if any, (which, if they exist, must be set forth in the required writing) are objective, measurable, and selected based on clinical evidence or credible medical support and any changes to such outcome measures are made prospectively and set forth in writing.

An "outcome measure" means a benchmark that quantifies: (a) improvements in or maintenance of the quality of patient care; or (b) reductions in the costs to, or reductions in growth in expenditures, of payors while maintaining or improving the quality of patient care. According to CMS: "outcome measures may not be applicable to all value-based arrangements[; h]owever, if the value-based arrangement does include outcome measures that relate to the receipt of the remuneration..., such outcome measures must be determined in advance of their implementation".²³ Also, according to CMS: "requiring immediate termination of a value-based arrangement due to an ineffective value-based activity would be counterproductive[, and thus] parties may amend their value-based arrangements to address identified deficiencies at any time, provided that the amendments are prospective only, including any amendments to the compensation terms of the arrangement."²⁴

4. The arrangement is commercially reasonable.

None of the value-based exceptions include three of the "traditional" requirements found in many Stark Law exceptions that compensation be set in advance, represent fair market value, and not be determined in a manner that takes into account the volume or value of a physician's referrals or other business generated by the entity. However, in the no financial risk exception, CMS has retained the "traditional" requirement found in many Stark Law exceptions that a value-based compensation arrangement be commercially reasonable. As defined in final 42 C.F.R. § 411.351, "commercially reasonable" means that "the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty."²⁵ For purposes of the no risk value-based exception, a legitimate business purpose must include achievement of the value-based purpose(s) of the value-based enterprise of which parties to the value-based arrangement are participants.

5. No less frequently than annually, or at least once during the term of the arrangement if the arrangement has a duration of less than 1 year, the value-based enterprise or one or more of the parties thereto must monitor the arrangement.

To satisfy this requirement, the VBE or parties thereto must monitor: (a) whether the value-based activities required under the arrangement have been furnished, (b) whether and how continuation of the value-based activities is expected to further the value-based purpose(s) of the VBE, and (c) the progress toward attainment of the outcome measures, if any, against which the recipient of the remuneration is assessed. If the monitoring indicates that a value-based activity is not expected to further the value-based purpose(s) of the VBE, the parties must either terminate the arrangement within 30 consecutive days, or terminate the ineffective value-based activity within 90 consecutive calendar days after completion of the monitoring. Likewise, if the monitoring indicates that an outcome measure is unattainable during the remaining term of the arrangement, the parties must terminate or replace the unattainable outcome measure within 90 consecutive calendar days after completion of the monitoring.

Final Thoughts

The transition from a primarily volume-based to a primarily value-based health care delivery and payment system now appears inevitable. How long the full transition will take is unknown. However, this paradigm shift in the provision of American health care will likely occur sooner than later. Accordingly, as a matter of good business practice, health care providers should familiarize themselves with the new Stark Law value-based exceptions and incorporated value-based definitions (as well as the new AKS and CMP final rules) as soon as possible.

Footnotes

1 Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations, 85 Fed. Reg. 77492 (December 2, 2020).

2 Medicare and State Health Care Programs: Fraud and Abuse; Revisions of Safe Harbors Under the Anti-Kickback Statute, and Civil Monetary Penalty Rules Regarding Beneficiary Inducements, 85 Fed. Reg. 77684 (December 2, 2020).

3 Id.

4 85 Fed. Reg. 77493 (December 2, 2020).

5 The new Stark Law final rule was issued by HHS' Centers for Medicare & Medicaid Services (CMS).

6 42 U.S.C. § 1395nn(a)(1)(A).

7 The new AKS final rule referenced in footnote 2, supra, sets forth three similar AKS value-based safe harbors; however, this article focuses on the new Stark Law value-based exceptions because the Stark Law is a strict liability statute and these new Stark Law exceptions protect a broader array of value-based arrangements.

8 85 Fed. Reg. 77497 (December 2, 2020).

9 Each of these value-based definitions are codified at new 42 U.S.C. §411.351.

10 85 Fed. Reg. 77500 (December 2, 2020).

11 85 Fed. Reg. 77499 (December 2, 2020).

12 85 Fed. Reg. 77501 (December 2, 2020).

13 85 Fed. Reg. 77496 (December 2, 2020).

14 Each of these requirements is found in each of the three Stark Law value-based exceptions codified at new 42 C.F.R. § 411.357(aa).

15 See new 42 C.F.R. § 411.357(aa)(1).

16 See new 42 C.F.R. § 411.357(aa)(1)(vii).

17 See new 42 C.F.R. § 411.357(aa)(2).

18 See new 42 C.F.R. § 411.357(aa)(2)(ix).

19 85 Fed. Reg. 77516.

20 Each of these requirements is found in the meaningful downside financial risk exception codified at new 42 C.F.R. § 411.357(aa)(2).

21 See new 42 C.F.R. § 411.357(aa)(3).

22 Each of these requirements is found in the no financial risk exception codified at new 42 C.F.R. § 411.357(aa)(3).

23 85 Fed. Reg. 77519 (December 2, 2020).

24 85 Fed. Reg. 77520 (December 2, 2020).

25 85 Fed. Reg. 77509 (December 2, 2020).

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